When you’re investing in stocks, it’s not just about making a short-term gain or receiving sizable dividends. You also have to include other factors into the equation. If you want to make a difference both economically and ecologically, your focus should be on investing in sustainable stocks.
So, how do you establish a portfolio of sustainability and why is this component of investing important? While some stocks shine when it comes to earnings, the companies they represent also create a large amount of pollution or waste energy – both which contribute to a less sustainable environment.
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Therefore, to make a difference yourself, or fight things like global warming or greenhouse gas (GHG), your investments must be sustainable. This means avoiding investments in companies that are engaged in activities such as petroleum production, natural gas refining, chemical manufacturing, or power plant technologies.
While some of these companies may be involved in supporting crop production and the use of more sustainable technologies, such as biofuels, the air pollution or GHG they are producing may still make them the wrong investment.
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Why Sustainable Investing is Important
Because sustainable investing involves a more “sustainable” quality of life, it is important to direct your investments toward businesses that support this type of effort. To understand this component, you need to define sustainability and the factors that contribute to this type of activity.
Let’s first look at the Harvard Business School definition of business sustainability. When a business focuses on sustainability, it creates a strategy to produce products and services that have a positive effect on their business as well as society.
At this time, according to a McKinsey research report, around 70% of businesses have implemented a formal policy for sustainability. The idea behind the initiative is to avoid environmental breakdowns and problems with providing people with the basic necessities of living.
When a business makes its goals sustainable, they must consider several criteria – all of which affect people socially, economically, and environmentally. To make this happen, it is important for a company to track their operations so any short-term gains do not translate into eventual liabilities.
However, that does not mean companies that follow sustainable practices will follow the same formula. Sustainability takes one of various forms in the business community. Therefore, the practices a company follows are unique to that company.
How Companies Practice Sustainability
While some companies use ecologically-friendly materials, such as bamboo, to manufacture products, other companies may depend on renewable energy in order to operate. Still others might cut down on greenhouse gas by reducing the distance traveled between one point to the next. Some businesses focus on funding educational initiatives in their local community.
However, just because a company follows sustainable practices, does not mean that it is fully committed. For example, if a company’s balance sheet shows that the business still makes most of its profits from unsustainable practices, it will still cancel out any renewable initiatives that are made.
So, when you build a sustainable portfolio of stocks, it is important to keep this one fact in mind.
What to Ask When Building a Portfolio
Ask two key questions.
- What is behind a company’s motivation to make profits?
- What drives their success in the stock market?
If the company’s main focus leads to upsetting the ecological balance, or results in waste or inequality, you need to direct your sights on companies that are directly addressing problems that lead to waste, pollution, or social imbalances.
When a business primarily focuses on sustainability, it can make a major difference in how the world operates now and in the future. Companies that directly practice sustainability consider how what they are doing impacts water use, emissions, and carbon production.
Using ESG Analytics to Determine a Company’s Performance
As an investor, you can use ESG analytics to investigate a stock’s impact on the environment and society. ESG is short for environmental, social, and governance – all considered metrics that are used to gain insight into a business’s ethical impact.
Figuring a company’s ESG can get complicated. However, it’s important to know this rating, as it can also determine your success as an investor.
Research reports show that companies with high ESG scores usually have lower debt and equity expenses. Because they practice sustainability directly, they can glean the support of the public, which, in turn, improves their earnings.
As a result, those companies that align their mission and values with improving and maintaining sustainability and who meet public expectations, often experience new opportunities for growth. When they show their support for sustainability through their management activities, they also end up making more money and improving their position on the stock exchange.
How ESG Scores are Determined
According to the leading media business company, Thomas Reuters, the ESG score of a company is determined from calculating analytics under 10 main categories. For example, companies are assessed environmentally based on the resources they use, the innovations they’ve made, and their emissions.
The governance part of the score is based on how companies treat their shareholders, how they are managed, and their corporate social responsibility (CSR) practices. CSR practice areas cover promotions, communications, and assessment processes.
With respect to ESG social metrics, the ESG score is based on the company’s workforce culture, its commitment to human rights, how it supports community development, and what it is doing to make products sustainable and safe for customer use.
What Is Considered a Good ESG Rating?
You can find ESG ratings for companies online. However, you still might wonder what constitutes a good score and what makes up a not-so-good score.
Methodologies for obtaining ESG ratings may vary. However, in basic terms, scores are often given that range from 0 to 100 on the rating scale. Usually, a company that has an ESG rating of at least 70 is considered good. Bad scores begin at 50 and sink lower down the scale.
Some ESG rating firms use letters to rank a company. Companies with triple A ratings are the best ESG-rated companies while a company with a triple C rating is a bad choice for sustainability investors.
Make the World a More Equitable Place in Which to Live and Work
You have it in your power to help save the planet – to make the world a more equitable place to live and work. That is why investing in sustainable stocks is important – not only to your financial health but also to the well-being of your children and others in the world.
